Question about the debt limit

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lawman said:
Does everyone agree that default on treasuries would be one of the last things to happen?

Will any of you avoid treasuries due to this issue?
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Why would Treasuries be last? Do you think we will stop issuing Social Security checks before we stop paying bond holders?
 
Yeah, I would not want to be in Janet Yellen's shoes if it ever comes down to that... should I destroy the creditworthiness of the USA or stop issuing SS checks, payroll checks to military and government employees, paying government payables, etc.

I guess if it were me I would prioritize the full faith and credit since the latter would put a lot of political pressure on Congress to get their act together, but I hope/think that we will never get to that point.

On the last part, I am not avoiding Treasuries due to the debt limit.
 
I doubt Yellen would start picking and choosing. As described by the Committee for a Responsible Budget, previous analyses pointed the other way:

"So-called “prioritization” of payments, or making sure certain obligations among the more than 80 million that get paid per month are paid before others – such as servicing debts to bondholders before making other payments in order to avoid technical default – has been criticized as unrealistic by Treasury officials and economists. A Treasury Inspector General report from 2012 outlined scenarios that were considered during the 2011 debt ceiling run-up and found that delay of payments, which suspended all government payments until they could all be paid on a day-to-day basis, was the least harmful scenario."

I think it is far more likely that the Administration would get up to the point of absolute default (literally letting the financial markets start to melt down) and then take a chance at unilateral executive action. Probably not the exotic platinum coin or declaring the debt ceiling unconstitutional but maybe creating a "special purpose entity" to issue new securities distinct from Treasuries and not subject to the debt ceiling as some legal eagles have suggested.

If it goes that far I suspect we can all expect a substantial hit on our portfolios.
 
donheff said:
Why would Treasuries be last? Do you think we will stop issuing Social Security checks before we stop paying bond holders?
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I do.

You can catch up on SS but bond default damages the country, raising cost to borrow and dollar's status as reserve currency.
 
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pb4uski said:
What you are missing is that the debt obviously doesn't work because Congress routinely passes appropriations which, combined with debt from past spending, exceed the debt limit and then the same Congress later goes crazy when it is time to increase the debt limit... which only needs to be increased because for appropriations that Congress passed.
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Thanks, now I understand where you're coming from.
 
I am still amazed that some think the debt limit is not paying the current debt...


The US has enough cash coming in that they can pay all debt payments when it comes due... it is not that treasuries will not be able to be paid.. and they have to ability to issue new debt for the principal that has matured...



The problem is that for every dollar the US spends on current items it has to borrow 43 cents... the default is not paying SS, medicare, the employees (including defense) etc. etc... because there is no extra money coming in...


So in order to send out SS checks and all other current expenses (that has already been appropriated) you need to continue to borrow more funds... that is why the debt limit needs to be increased...


Now, when there is no ability to borrow any new principal the Treasury gets to choose what is paid and what is not... they CAN choose to default on the debt and send out SS checks, but that is a choice..
 
^^^^^ You lost me in the last paragraph. Do you mean to suggest that Treasury can decide which of Congress’ obligations to pay and not to pay? I really don’t think Janet Yellen gets to decide whether to pay SS checks.
 
Well somebody has to unless a decision is made to not pay anything if you can't pay everything, and that seems silly.
 
pb4uski said:
Well somebody has to unless a decision is made to not pay anything if you can't pay everything, and that seems silly.
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Fed finance experts are pouring over what they can and can't do. But, to some extent their hands are tied. Right now the debt ceiling has been reached. There isn't enough $ left in the proper account to pay the interest on current bonds. So they are taking "extraordinary steps" including taking current year payment funds from the Civil Service Pension Fund and applying them to the debt payments. Social Security Trust funds are already largely invested in Treasuries so there isn't much room in liquid current year funds there but at some point those will be depleted as well. It isn't clear to me how much latitude the Treasury has to move from pot A to pot B. At lower levels if we did it wrong we could go to jail. Can Treasury divert DOD funds to pay debt interest?
I have noticed that no talking heads are talking with any apparent knowledge about what flexibility exists.
 
Yeah, given how much planning for obscure scenarios that the government does you would think there would be something somewhere outlining what gets paid and what doesn't, but I guess not.

Washington Post article (might be paywalled)

From what I've read it sounds like debt and legally required payments would be prioritized over payments for discretionary spending.

What is the debt ceiling, and what happens if the U.S. hits it?

https://www.washingtonpost.com/politics/2023/01/18/debt-ceiling-america-economy/

...What happens if the government defaults on its debt?
It wouldn’t be pretty. When the United States was on the brink of breaking through the debt ceiling in October 2021, The Post’s Alyssa Fowers reported that it would not be able to pay more than 60 percent of its bills the first week of a default. The government would be forced to prioritize among various expenditures it’s already legally bound to make — but wouldn’t be able to borrow money for — such as paying for Social Security, issuing tax refunds and paying the salaries for federal workers and members of the military. ...
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Markola said:
^^^^^ You lost me in the last paragraph. Do you mean to suggest that Treasury can decide which of Congress’ obligations to pay and not to pay? I really don’t think Janet Yellen gets to decide whether to pay SS checks.
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Yes she does.... they said on TV today that they can offer IOUs instead of sending out checks... not sure how that works but in the back of my mind I remember something like this happening before... might have been a state instead of the US gvmt...


I also do not see how an IOU is not considered a debt obligation... all the treasuries and bonds are nothing more than and IOU...
 
Texas Proud said:
Yes she does.... they said on TV today that they can offer IOUs instead of sending out checks... not sure how that works but in the back of my mind I remember something like this happening before... might have been a state instead of the US gvmt...


I also do not see how an IOU is not considered a debt obligation... all the treasuries and bonds are nothing more than and IOU...
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They may be able to issue IOUs - they paid in scrip during WWI (IIRC). But that is not the same as picking and choosing who gets the $$s and who gets the IOUs. I don't know the answers but I would guess it is more constrained than we might expect.
 
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donheff said:
They may be able to issue IOUs - they paid in scrip during WWI (IIRC). But that is not the same as picking and choosing who gets the $$s and who gets the IOUs. I don't know the answers but I would guess it is more constrained than we might expect.
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An interesting read...



https://www.crfb.org/papers/qa-everything-you-should-know-about-debt-ceiling#what happens



What happens if the debt ceiling is hit?

Once the government hits the debt ceiling and exhausts all available extraordinary measures, it is no longer allowed to issue debt and soon after will run out of cash-on-hand. At that point, given annual deficits, incoming receipts would be insufficient to pay millions of daily obligations as they come due. Therefore, the federal government would have to at least temporarily default on many of its obligations, from Social Security payments and salaries for federal civilian employees, and the military to veterans’ benefits and utility bills, among others.
So-called “prioritization” of payments, or making sure certain obligations among the more than 80 million that get paid per month are paid before others – such as servicing debts to bondholders before making other payments in order to avoid technical default – has been criticized as unrealistic by Treasury officials and economists. A Treasury Inspector General report from 2012 outlined scenarios that were considered during the 2011 debt ceiling run-up and found that delay of payments, which suspended all government payments until they could all be paid on a day-to-day basis, was the least harmful scenario.
 
Texas Proud said:
... The problem is that for every dollar the US spends on current items it has to borrow 43 cents... the default is not paying SS, medicare, the employees (including defense) etc. etc... because there is no extra money coming in...
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Yikes! It's like a household spending 143% of its income. Umm... How does that work? "Oh, we just put it on a charge card".
 
^^^^^
I'd say that's correct... If they did, they just ignored it.
 
A handful of bonds defaulted under Nixon when the dollar unpegged from gold at the central bank level. I think that was the only default.

The political advantage to the debt ceiling is it doubles the amount of attention and politics: once when you authorize the spending, and once when you authorize the borrowing because you spent more than you have.

The public debt may be constitutionally valid, but the whole world knows we suppress interest rates and print money to pay the bill. Foreigners simply stopped buying our debts and invested their money elsewhere. China famously has sold most of their holdings and shifted to buying mines, ports, roads, and generally worldwide infrastructure projects instead. Since 2014, nada. Debt/GDP ratio this bad has only been fixed by inflating the money supply and impoverishing bond holders.

The rest of the planet saw how swiftly we seized assets via SWIFT and banking laws. Now they rightfully do not trust us.

We were unable to convince anyone to buy our longer dated notes, so we have refinanced from long to short duration for 30 years. A huge benefit to refi a TBill from the 80's at 17% or some such ridiculous rate down to 2%. Within a few more years the long duration notes and higher interest rate notes will be gone. Meaning a sudden spike in interest rates has an immediate effect on FICA and Medicaid and Military budgets.

The government is now financed by short term credit rates, without the steadying effect of long term mortgage rates.

California went from something like $100B surplus to $30B deficit in 9 months. Fedgov finances will have similar volatility.
 
indiajust said:
We were unable to convince anyone to buy our longer dated notes, so we have refinanced from long to short duration for 30 years. A huge benefit to refi a TBill from the 80's at 17% or some such ridiculous rate down to 2%. Within a few more years the long duration notes and higher interest rate notes will be gone. Meaning a sudden spike in interest rates has an immediate effect on FICA and Medicaid and Military budgets.

The government is now financed by short term credit rates, without the steadying effect of long term mortgage rates.
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Really?

It looks to me like people wanted to buy ~$58B of 30 year Treasury bonds in November 2022 and the Treasury sold ~$28B or so of them at a yield of 4.08% or less:

https://www.treasurydirect.gov/instit/annceresult/press/preanre/2022/R_20221110_3.pdf

A similar result at a lower interest rate occurred three months earlier:

https://www.treasurydirect.gov/instit/annceresult/press/preanre/2022/R_20220811_3.pdf

It looks to me like there is more than twice the demand for 30 year Treasuries as there is supply, at least over the most recent six months. Similar demand/supply results also occurred for 20 year Treasuries. And 30 year TIPS. And 10 year notes.

Maybe I'm misreading those announcements, or maybe I misunderstood your comments.
 
Murph said:
I don’t think they pay any attention to the debt limit when drafting the omnibus spending bills.
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....or when passing massive tax cuts in 2001, 2003, & 2017.
 
No, I suspect communication errors are on my side of the keyboard...

If you look at a mix chart of total debt broken by duration, there is an obvious shift from long to short over the decades, as well as the total rising of course.

The interesting part is that the total interest on the debt has been dropping continuously over the same time frame. The monthly payments have gone down as the total has gone up. Thats from reissuing at lower rates.

What you saw I attribute to dramatic revision of risk perception. Bonds might be -5% real return, but that is better than -30% in stocks.

Bonds had too much risk and not enough reward for the past few years... as 2022 showed. I won't do a 10 at that rate, but at least the risk/reward for bonds has returned for consideration.
 
flyingaway said:
If they could get rid of the debt limit, then there would be no limit on the annual government budget.
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The debt ceiling does nothing except to present the opportunity to destroy the credit of the United States. Congress controls the budget, the budget doesn't control the Congress. The same people that want to flirt with default to get their way can play hardball with the budget (or more accurately, the appropriations, to implement the budget) to get their way. We have been there many times before - it is called a Government shutdown. Same old brinkmanship with the exception that mandatory spending (e.g. the debt payments, Social Security, Medicare, and a few others) continues. So, the only advantage of the debt ceiling as a creative tool is that you will also slam the brakes on the safety net as well as payment to our creditors (which, of course includes us as well as the rest of the world). Its a form of mutually assured destruction and I don't see any benefit in giving such a nasty tool to the clownshow on the Hill. If they ever actually go there we have no idea how bad the outcome could be.
 
I thought the last actual budget was in the Clinton or early bush years, but don't recall. It's been a lifetime of "continuing resolutions". kicking the can is literally the default system response.

I used to think a procedural innovation such as a financial amendment might work (balanced budget/gramm rudman), but any procedure invented by democracy can be subverted by that same democracy. There is no way to prevent government from abrogating property and contract rights in money. Not while elites trade money for power and government elites sell power for money and more power.

Perhaps this is why the constitution had no designated currency, only gold, and we voided the first two central banks?

Sigh.

Dutch, Roman, Spain, Portugal, British, even a bit of sweden.... an awful lot of empires have overstayed their welcome playing games with money. I'm just a bystander at this point of the race, waiting and wondering which corner the cars will stack up in and how hard they hit the wall.
 
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